Mid-cap funds stand for middle capitalization funds or rather medium capital funds, referring to investments in stocks of medium-sized companies. The Securities and Exchange Board of India (SEBI) prepares the list of companies according to their capital size. The companies ranking from 101st position to 250th are mid-capitalization companies. As per the rules of SEBI, funds that invest majorly in the stocks of such companies are mid-cap funds.
Understanding Mid-Cap Funds: How They Function
Mid-cap funds are equity mutual funds that allocate 65% or more corpus to stocks of medium capital size companies. Mid-cap funds are known for giving impressive risk-adjusted returns, with small-cap growth and large-cap stability. This is why they are often referred to as ‘sweet spot’, which is a term in golf when the hit gets maximum results.
Mid-cap funds contain middle capitalization stocks that could be the next large-cap stocks but have not made it to that status. They are either overlooked because of the dominance of large-cap companies in the share market or are still in the process of increasing their market value. Sometimes, mid-cap funds include medium-sized company stocks that were previously large-cap but may have fallen in size due to adverse market conditions. Mid-cap funds have an advantage over large-cap funds when it comes to earnings growth.
Similarly, small-cap funds focus on small stocks that can have massive growth but unlike their mid-cap peers, small companies are not so established businesses. Mid-cap companies have more revenue streams, cash flow, and seasoned management. Most mid-caps are the ones that have grown over their status of small-capitalization. They can raise more funds to obtain additional finance which is a part of growth. Mid-cap companies are often involved in acquisitions and mergers to fuel their expansion, especially with the large-cap businesses, so that mid-cap companies could grow and large-cap companies can cut down on competition in the market.
Mid-cap funds concentrate on those medium-sized companies that have strong business models and foothold in their respective industries. They are in the process of expanding their market share value and overall competition.
Benefits of Mid-Cap Funds
Mid-cap funds are sandwiched between their large-cap and small-cap counterparts, with an advantage over both of them. They provide a middle ground between the two for large-cap stability and small-cap growth. The benefits of mid-cap funds are:
- Mid-cap funds can get their investors moderate returns as the mid-cap companies have immense potential for growth earnings. They have a good business record and are in the making of the next big thing. They will experience rapid growth as they expand
- Although mid-cap funds are also subject to market risks like all mutual funds, they are less sensitive to market fluctuations. They do not tumble down very easily during tough conditions due to their steady cash flow
- Mid-cap funds can beat the returns of both large-cap and small-cap funds as they can grow at a faster rate than large-cap and are less volatile than small-cap funds
- Mid-cap funds can give great profits coupled with stability as they are less sensitive to market shifts
Should You Invest in Mid Cap Funds?
Different investors have different investment purposes and risk appetites and they should invest in funds likewise. Investors should go for mid-cap funds if:
- If they seek capital generation to create a good corpus for themselves in the long run. Mid-cap stocks are at a stage where they can determine if it lives up to their full potential and can generate immense revenue. Therefore, it will benefit the mid-cap funds’ investors
- If you wish to invest for a long duration, such as for about 7 years or more because mid-cap companies are on the stepping stones to be their large size. It will take time to achieve that status and earn the investors a handsome profit
- If you are an aggressive investor with a high-risk appetite. Mid-cap funds are surely less likely to falter than small-cap funds but are also more volatile than large-cap funds
- If you wish to diversify your portfolio, adding a small percentage of mid-cap funds to your investments can derive great benefits during economic revivals. Mid-cap stocks are the ones that have generally been in profit and belong to the growth sector. They may have a niche market segment of their own
Wrapping it up:
Mid-cap funds are those equity mutual funds that invest a large portion of the fund money in mid-cap stocks that are heading in the right direction. Fund managers identify such stocks that are under-researched and invest in them to obtain optimum returns. They give good returns combined with lesser volatility, falling between the risk-return spectrum of large-cap and small-cap funds.